The financial performance of Skyworks in the past few years have been nothing short of spectacular. Between fiscal years 2013 and 2015, Skyworks Solutions (NASDAQ:SWKS) saw its revenue grow by over 80% to $3.26 billion. At the same time net income grew 187% to $0.79 billion. During the same period, all margins improved as well. As a result, the share price went from around $20 in 2013 to well over $100 in 2015. But ever since reaching this high, the stock has underperformed significantly and has even seen $60 per share. Does this mean that the growth story has come to an end? I think not.
Correlation to Apple
Skyworks' share price is strongly correlated to Apple's (AAPL) because of the significant percentage of total revenue it derives from this company. Skyworks doesn't directly sell its products to Apple, but sells them to Foxconn, which is a major supplier of Apple. In fiscal years 2015 the total percentage of revenue derived from Foxconn was 44%. Therefore it comes as no surprise that a lot of investors focus on Apple when analyzing this stock. When Apple's share price performs well, so does Skyworks' share price. The same is true when Apple's share price underperforms as we have seen happening since the summer of 2015. Now that Apple's revenue growth has disappeared and its future growth seems uncertain, investors think the same way about Skyworks. It almost seems like investors forget that although Skyworks derives a significant part of its revenue indirectly from Apple, the company is so much more than just a supplier for Apple's products.
More than a supplier for Apple
Together with its subsidiaries, the company produces innovative analog semiconductors and focuses on smartphone, automotive, broadband, medical, tablet and wearable markets among others. Besides Apple, a few of the key customers include: Cisco (CSCO), Alphabet (GOOG), Samsung, Microsoft (MSFT) and General Electric (GE).
Apple may not be a source of significant revenue growth going forward, but it will stay a reliable source of more or less steady income. On top of that management has been working hard to make the company's future less dependent on that of Apple's. The percentage of total revenue coming from Foxconn has already been declining. Other areas of growth have emerged for Skyworks as was again made clear in the 10-Q filing for the third quarter:
"The increase in revenue for the nine months ended July 1, 2016, was primarily driven by our success in capturing a higher share of the increasing RF and analog content per device as smartphones continue to displace traditional cellular phones, increased strength in emerging markets due to the adoption of 3G and 4G technologies, the increasing number of applications for the Internet of Things, and our expanding analog product portfolio supporting new vertical markets including automotive, industrial, medical and military, partially offset by the aforementioned decline in end-product demand from a key smartphone customer."
IoT, the future of Skyworks
Skyworks is also expected to profit a lot from 5G when that transition is in full swing. But I believe that the IoT market will grow out into the most profitable for Skyworks in the future. This market has huge growth potential in the near- and long term. It's currently expected that the total number of devices connected to the internet will increase to 34 billion by 2020, up from 10 billion in 2015. Nearly $6 trillion is expected to be spend in the IoT market by that time. Companies that have been working on improving their positions in this strong growth market have the opportunity to see significant financial growth in the coming years. Skyworks is one of these companies since it has been investing heavily multiple areas of this market which can be seen here.
Fourth Quarter Results
The fourth quarter results were released earlier this month. During this quarter the company generated revenue worth $835.4 million. Although this was a decline of 5.2% yoy, Skyworks still managed to beat expectations by $4.1 million. EPS was realized above expectations as well: $1.47 compared to an expected $1.43, although this was still a 3% decline yoy. Operating income was $318.4 million, while CFO was realized at $455 million. At the end of the quarter the company had 0 debt on its balance sheet.
Obviously the yoy decline in both top line and bottom line comes as no surprise to anyone considering Apple's performance. But management seems to have high expectations for the future as was shown in the press release of the fourth quarter results: "As our results and outlook reflect, Skyworks is capitalizing on the strength of both Mobile and Internet of Things ecosystems," said Liam K. Griffin, president and chief executive officer of Skyworks. "Specifically, we are in the midst of a dramatic sea change in the usage case for wireless technologies and the way they are transforming how we live, work and play. As a virtual hub for e-commerce, enterprise to the cloud, social media, gaming and entertainment, mobile devices are rapidly evolving to address the massive demand for data and speed across an increasingly crowded spectrum. Skyworks is resolving this daunting complexity with customized system-level solutions to ultimately improve the user experience with higher levels of efficiency, enhanced streaming capabilities and expanded network coverage. As a result, we are well positioned to continue delivering above-market growth, profitability and shareholder value."
Valuation / Conclusion
If we look at Skyworks' current share valuation, it looks significantly undervalued compared to its peers. The company generates an operating margin of 33.7% versus its competitors' average of 19%. Net margin is even double that of the 14.5% that its competitors generate. These high margins are achieved without generating any debt. Still, Skyworks' P/E ratio of just 15.4 is notably lower than the industry average of 25.2. Because Skyworks still is expected to generate higher income in the future, the forward P/E ratio is currently valued at 11. This undervaluation is the result the uncertainty that Apple's future seems to bring. But as stated earlier: Skyworks is a lot more than just an Apple supplier.
The company is currently positioning itself to capitalize on the growth market of IoT. As a result the performance in share price and financials will start to outperform those of Apple. As progress becomes more and more obvious on this front, the stock's valuation will increase significantly. Even if Skyworks' stock price will be valued at a 20% discount (P/E of 20) to the industry average, with current financial results, this would mean a price target of $100 vs a current share price of $78. Multiple analysts seem to agree that the prospects for this stock's future are improving. Earlier this month Cowen increased its price target to $80 and Craig Hallum to $90. Expect more of these upgrades the coming months.
This article was written by
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.